8% income tax vs graduated rates + percentage tax: the rule and the forms

If you are self-employed or run a small business, BIR lets some people choose how their income is taxed. This guide explains who may choose, how and when the choice is made, and what each choice means for the forms you file. It does not tell you which is better. That depends on your numbers: compute both, or ask a CPA.

The two options

For an individual earning from self-employment or a profession whose gross sales or receipts and other non-operating income do not exceed the VAT threshold of P3,000,000, RR 8-2018 gives two options:

1. Graduated income tax rates on net income, plus percentage tax under section 116 of the Tax Code. 2. 8% on gross sales or receipts and other non-operating income (less P250,000 if you earn purely from self-employment or profession), in lieu of both the graduated rates and the percentage tax.

The percentage tax under section 116 is 3% of gross quarterly sales or receipts for a person who is not VAT-registered.

Who may choose 8%

All of these must be true, per the RMO 23-2018 digest:

- You earn from self-employment and/or practice of a profession (single proprietor, professional or mixed income earner). - Your gross sales/receipts and other non-operating income did not exceed P3,000,000 in the taxable year. - You are registered under, or subject only to, the section 116 percentage tax, or are exempt from VAT and other percentage taxes. - You signified the choice (next section).

Not eligible, per the same digest and RR 8-2018: purely compensation earners, VAT-registered taxpayers whatever their sales, taxpayers subject to other percentage taxes under Title V, partners of a general professional partnership, and those exempt from income tax. A BMBE-registered business cannot use the 8% option at the same time as its BMBE status (RMO 23-2018 digest).

Earners of mixed income (salary plus business) may choose 8% on the business income, but the P250,000 reduction does not apply to them (RMO 23-2018 digest).

How and when the choice is made

The rule in RR 8-2018: unless you signify the 8% in the first quarter return, or in the initial quarter return of a new business, you are treated as on graduated rates. The election is irrevocable and the option cannot be amended for that taxable year.

The RMO 23-2018 digest lists where you can signify it:

Your situation · Where you signify; New registrant · Registration on BIR Form 1901 and/or the 1701Q, or the initial quarter return (2551Q and/or 1701Q); Existing business · BIR Form 1905 at the start of the year, or the first quarterly percentage tax return, or the first quarterly income tax return

On the 1701Q the choice is Item 16. BIR Form 1905 has an "Avail of 8% Income Tax Rate Option" box.

It resets every year. Per the same digest, everyone starts each taxable year on graduated rates; the 8% is effective only for the year it was elected, and must be signified again each year. This is the point many people miss: if you were on 8% last year, nothing carries over by itself.

What happens if you pass P3,000,000

If your gross sales/receipts and other non-operating income go over the VAT threshold during the year, you are automatically on graduated rates, with a credit for what you already paid under 8%, and you become liable to VAT going forward. You must update your registration within the month after the month you crossed the threshold (RR 8-2018; RMO 23-2018 digest).

Which forms you file under each choice

· 8% option · Graduated rates + percentage tax; Quarterly income tax · BIR 1701Q, 3 times a year · BIR 1701Q, 3 times a year; Quarterly percentage tax · Not filed · BIR 2551Q every quarter; Annual return · BIR 1701A (Financial Statements not required to be attached) · 1701A if you use the optional standard deduction (its header); Update to registration · BIR 1905 if you elect through it · none needed

Sources: the 8% filer is not required to file the quarterly percentage tax return but must file the quarterly and annual income tax returns (RMO 23-2018 digest). The 1701Q is due May 15, August 15 and November 15 (1701Q guidelines). The 2551Q is due within 25 days after the end of each quarter (RA 11976, amending section 128). The 1701A header says it is for individuals under graduated rates with OSD, or on the 8% option.

Under graduated rates the 1701Q lets you pick itemized deduction or the optional standard deduction of 40% of gross receipts (Items 39 and 40, 1701Q form). That choice is also irrevocable for the year (1701Q guidelines).

Under both options you still keep books of accounts and issue receipts or invoices (RMO 23-2018 digest).

Mistakes that cause trouble

- Assuming 8% carried over from last year. It reverts to graduated rates each January (RMO 23-2018 digest). - Waiting to decide until the first return is late. If you do not signify the 8% in the first quarter return, you are treated as on graduated rates and the election is locked for the year (RR 8-2018). - Filing both 2551Q and an 8% 1701Q. Choosing 8% replaces the percentage tax. - Forgetting the P3,000,000 includes other non-operating income. It is not sales alone.

Questions

Pwede pa ba akong mag-8% kung hindi ko natick sa 1901?

RR 8-2018 and the RMO 23-2018 digest let an existing business signify it in the first quarter return, and a new registrant in the initial quarter return. If your Certificate of Registration shows something different, confirm with your RDO.

Do I have to renew the 8% every year?

Yes. The RMO 23-2018 digest says the option is effective only for the year it was elected and must be signified every taxable year.

Can I switch from 8% to graduated in the middle of the year?

Not by choice. RR 8-2018 says the election is irrevocable for that taxable year. The only automatic change is when you pass P3,000,000.

Which is cheaper, 8% or graduated?

That depends on your income, expenses and whether you take the optional standard deduction. Compute both for your own numbers or ask a CPA. BIR sets only the rule, not the best choice.

Last checked 2026-10-12. Not affiliated with BIR, SSS, PhilHealth, Pag-IBIG or any government agency.

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